Takeaways from the SEC's Comments on Last Year's Pay Versus Performance Tables

The SEC's comments were technical, and we suggest issuers:

Use graphs to discuss the relationship between metrics in the PVP table as required by Item 402(v)(5), as pure narrative disclosures were more often singled out for comment.
Ensure that the disclosure around the calculation of "compensation actually paid" is detailed, and matches a common form from last year’s filing (with one technical adjustment detailed below).
Remember to include a disclosure explaining how non-GAAP measures included in the PVP table are calculated from the issuer’s audited financials. Cross references to another filing are insufficient.
Avoid using a broad-based equity index for their peer group TSR figures.

The SEC is randomly reviewing Pay Versus Performance (PVP) table disclosure from last year's proxies, with filed comments starting in August of 2023 and continuing through the writing of this alert in Late-January 2023.

The SEC’s comments focused on technical compliance and corrective nits. We have ignored the nits (e.g., where the SEC caught mismatched values or misplaced footnotes) or clear missteps (failing to include net income in the table as required).

Of note, our understanding is that the SEC has also requested that companies respond by agreeing to make the noted changes in future years, an approach taken by all the filed response letters reviewed.

Major Comments

The following comments were far and away the most common among reviewed letters from the SEC.

Metric Comparison

Comment: Failure to fully compare the relationship between the various metrics disclosed in the PVP table as required by Item 402(v)(5). One company was also flagged for including new metrics in the comparison (i.e., metrics not otherwise discussed in the PVP table)
Practice Point: Companies that relied on narrative comparisons were more likely to receive this comment. Going forward, we recommend companies utilize graphs to articulate each relationships required by the rule.

Compensation Actually Paid

Comment: Failure to adequately describe the adjustments made to summary compensation table values to arrive at compensation actually paid.
Practice Point: Here, the SEC took issue with a common practice last year. A number of companies, including some referenced as good examples in DFIN’s latest “Guide to Effective Proxies," used something like the following table to reconcile SCT equity values to "compensation actually paid" figures (this example is from Chevron, who did not receive a letter):

The SEC took issue with columns labeled along the lines of “Year over year change in fair value of equity awards granted in prior years that vested in the year". They specifically opposed the phrase “year over year” in so far as this column should reflect the change in value of equity from the last day of the prior year through vesting.

For a more direct approach, we recommend something like: “Change in Fair Value from Last Day of Prior Year to the Vesting Date in the Current Year.”

Non-GAAP Company Selected Measure

Comment: Failure to disclose how non-GAAP company selected measures may be calculated from Company financials.
Practice Pointer: In each case, the SEC noted that “incorporation by reference to a separate filing will not satisfy this disclosure requirement”. Notably, the SEC permits companies to cross reference to, for example, the issuers 10-K, to explain non-GAAP financial results that are presented in a compensation context, but separate from specific incentive plan performance targets. This comment suggests that the SEC views the company selected financial measure as related to the incentive plan performance targets. (see CD&I 118.08)

TSR Peer Group

Comment: Incorrectly using a broad-based index from the issuer’s 10-K performance graph as the TSR peer group for the PVP table.
Practice Pointer: At a high level, the peer group TSR in the PVP table can be calculated using the company's peer group, or the industry or line of business index included in a company’s 10-K performance graph. Several issuers received a comment for using a broad-based index, such as the Russell 2000 index, S&P 500 or the Nasdaq US Benchmark TR Index, which the SEC did not consider sufficiently narrow to qualify as an “industry or line of business” index.

Type of Peer Group/Index	10-K Performance Graph	PVP Peer Group TSR	Practice Pointer
Peer Group	Option 1 of 3 (Item 201(e)(1)(ii)(B)	Permissible	We recommend selecting the peer group less likely to change (generally the 10-K group) to avoid needing to disclose TSR results for both the new and old version of the utilized peer group.
Industry or Line of Business Index from the 10-K	Option 2 of 3 (Item 201(e)(1)(ii)(A)	Permissible, but see practice pointer	Companies should not attempt to fit broad-based equity indices or market-cap based indices under this category, as those types of indices are separately specified under the rules (see below).
Market-Cap Based Index from the 10-K	Option 3 of 3, only if the company discloses that they cannot reasonably identify a peer group or industry or line of business index. (Item 201(e)(1)(ii)(C)	Permissible in narrow circumstances	In order to use this index in the PVP, the company would need to make the 10-K disclosure mentioned in the 10-K performance graph column, and we suspect most companies cannot make that disclosure.
Broad-based equity Index from the 10-K	Required (Items 201(e)(1)(i))	Not Permissible	The PVP only allows companies to utilize their performance graph peer group/index which is included in the 10-k per Item 201(e)(1)(ii) (e.g., the above categories). As broad-based equity indexes are incorporated in the 10-K under Item 201(e)(1)(i), they cannot be included in the PVP table.

Selected Minor Comments

Companies used incorrect TSR calculation. For example, one company calculated calculating year-over-year TSR growth instead of cumulative growth from the beginning of the period.
One company received a comment that their company selected financial measure did not match the financial measure used in their long-term incentive plan. Whereas the LTI figure used an adjusted ROTCE figure, the PVP table disclosed only the (unadjusted) ROTCE figure.
- This reinforces the point that the company selected measure should loom large in the incentive plan design.
Issuers failed to list each non-CEO executive officer used to calculate the non-CEO executive officer averages in the PVP table.
Companies disclosed more than one company selected metric, and failed to identify which was the most important metric and which were supplementary (as required by the rule).